Is OneConnect Financial Technology (NYSE:OCFT) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for OneConnect Financial Technology

What Is OneConnect Financial Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that OneConnect Financial Technology had CN¥2.13b of debt in December 2020, down from CN¥3.22b, one year before. But it also has CN¥5.12b in cash to offset that, meaning it has CN¥2.99b net cash.

How Healthy Is OneConnect Financial Technology's Balance Sheet?

We can see from the most recent balance sheet that OneConnect Financial Technology had liabilities of CN¥5.17b falling due within a year, and liabilities of CN¥433.3m due beyond that. Offsetting this, it had CN¥5.12b in cash and CN¥1.10b in receivables that were due within 12 months. So it can boast CN¥615.9m more liquid assets than total liabilities.

This state of affairs indicates that OneConnect Financial Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥46.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that OneConnect Financial Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if OneConnect Financial Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year OneConnect Financial Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to CN¥3.3b. With any luck the company will be able to grow its way to profitability.

So How Risky Is OneConnect Financial Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OneConnect Financial Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥704m and booked a CN¥1.4b accounting loss. However, it has net cash of CN¥2.99b, so it has a bit of time before it will need more capital. OneConnect Financial Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with OneConnect Financial Technology .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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